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King says risk is 'underpriced'

Bank of England governor Mervyn King has said that central banks need to balance a moral hazard against a possible shock to the financial system.

Speaking to the Treasury Committee King said they could take action if there was a risk to the system, but they did not want to boost risk-taking, Reuters reported.

"If risk continues to be underpriced the next period of turmoil will be on an even bigger scale," said King.

The bank has faced some criticism for not putting cash into the system like the Federal Reserve and the European Central Bank, but King said the banks had enough cash to stabilise their finances.

"Unless they (extra funds) were made available at an appropriate penalty rate they would encourage in future the very risk-taking that has led us to where we are."

The governor went on to say that he was not sure how the rise in money market interest rates would affect customers and businesses.